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When Does a Creditor Waive its Right to a Jury Trial in Bankruptcy?

By August 16, 2020June 23rd, 2022No Comments

When does a creditor waive its right to a jury trial in bankruptcy?  The question has been answered, at a high level, by the United States Supreme Court in Granfinanciera v. Nordberg, 492 US 33 (1989) and Langenkamp v. Culp, 498 US 42 (1990).

In Granfinanciera, the Supreme Court considered whether a creditor who does not file a proof of claim has a right to a jury trial in a fraudulent transfer action.  The Supreme Court ruled that “under the Seventh Amendment, a creditor’s right to a jury trial . . . depends upon whether the creditor has submitted a claim against the estate.” Id. at 58.  Since the creditor had “not filed claims against the estate,” the fraudulent transfer claim did not arise “as part of the process of allowance and disallowance of claims.”  Consequently, the creditor was entitled to a jury trial. Id. at 59.

In Langenkamp, decided only one year after Granfinanciera, the Supreme Court considered a nearly identical lawsuit in which the creditor had filed a proof of claim.  Because the creditor in Langenkamp had filed claims against the bankruptcy estate, the Supreme Court ruled that the creditor subjected itself to “the equitable jurisdiction of the Bankruptcy Court.” Langenkamp, 498 U.S. at 45.  Since bankruptcy courts are courts of equity, the Supreme Court ruled that the creditor in Langenkamp was “not entitled to a jury trial on the trustee’s preference action.” Id.

On first blush, Granfinanciera and Langenkamp appear to provide a simple and straightforward answer to the question presented.  If a creditor files a proof of claim, it loses its right to a jury trial.  If a creditor does not file a proof of claim, it retains its right to a jury trial.  But what if a creditor files a proof of claim for one purpose, but is later sued for an entirely different purpose?  Does the creditor waive its right to a jury trial for claims unrelated to its proof of claim?

That question was addressed by the United States Bankruptcy Court for the Middle District of North Carolina in Walter v. Freeway Foods, Inc. (In re Freeway Foods, Inc), 449 BR 860 (Bankr. M.D.N.C. 2011).  In Freeway Foods, a creditor filed a proof of claim for unpaid rent and filed a lawsuit against the debtor and others for breach of lease, fraud, and other causes of action.  The court compared the proof of claim to the claims asserted in the lawsuit on a claim-by-claim basis. Id. at 884.  Because the proof of claim for unpaid rent was indistinguishable from the claim for breach of lease, the court ruled the creditor did not have the right to a jury trial on her claim for breach of lease. Id.  The other claims, however, did not have anything to do with a claim for unpaid rent, so the court ruled the creditor retainer her right to a jury trial on those claims. Id. at 884-86.

As demonstrated by the Freeway Foods case, whether a creditor waives her right to a jury trial in bankruptcy “depends” on the specific nature of the proof of claim.  Lawyers and judges will have to analyze the claims at issue on an individual basis to determine the extent of the creditor’s waiver of its right to a jury trial.

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